ECO 302 Week 7 Quiz – Strayer

ECO/302 Week 7 Quiz – Strayer

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Chapter 10

TRUE/FALSE

1. High powered money is commodity money like gold and silver.

2. If households reduce money balances, then their transactions costs go up.

3. If the money supply grows faster than money demand, then the price level rises.

4. If the interest rate increases, then the real demand for money also increases.

5. The neutrality of money means that one time changes in the money supply do not affect real variables.

6. M1 includes a broader array of deposit accounts than M2 does.

7. In the Barro model, money and barter can both be used for exchanges.

8. In the Barro model, households hold money as a long-term store of value.

9. If the price level doubles, then a household’s nominal demand for money also doubles.

10. If the nominal quantity of money supplied does not vary, then the price level will be countercyclical.

MULTIPLE CHOICE

1. Fiat money is money that has value because of:
a. its intrinsic value. c. government decree.
b. it is a commodity. d. all of the above.

2. Commodity money is money that has value because:
a. of the intrinsic value of the commodity. c. the government says so.
b. it is legal tender. d. all of the above.

3. If a person holds one dollar and does not lose it, then as long as the person holds that dollar they will have:
a. the commodity value of the dollar. c. an interest bearing asset.
b. one dollar in currency. d. all of the above.

4. High powered money is:
a. money held by business for investment. c. total currency in circulation.
b. total currency in circulation plus depository institutions deposits at the Federal Reserve. d. government bonds held by the public and depository institutions.

5. A monetary aggregate is:
a. high powered money. c. money defined more broadly than currency.
b. commodity money. d. total currency in circulation plus depository institutions deposits at the Federal Reserve.

6. US M1 money includes:
a. currency held by the public. c. traveler’s checks.
b. checkable deposits. d. all of the above.

7. US M1 money includes:
a. savings deposits. c. time deposits.
b. checkable deposits. d. all of the above.

8. US M1 money includes:
a. currency, traveler’s checks and checkable deposits. c. currency, checkable deposits, savings deposits.
b. checkable deposits, traveler’s checks and savings deposits. d. currency, time deposits, checkable deposits.

9. US M2 money includes:
a. currency. c. small time deposits.
b. demand deposits d. all of the above.

10. US M2 money includes:
a. currency, time deposits government bonds. c. checkable deposits, savings deposits, small time deposits.
b. savings deposits, small time deposits, private bonds. d. retail money market mutual funds, small time deposits, government bonds.

11. Money is different from other assets like capital and bonds in that:
a. money does not pay interest. c. capital and bonds are better long term stores of value.
b. money can be spent for purchases. d. all of the above.

12. Money is different from other assets like capital and bonds in that:
a. money does not pay interest. c. money is a better long term store of value.
b. money has intrinsic value. d. all of the above.

13. Money is different from other assets like capital and bonds in that:
a. money pays a higher interest rate. c. money is a better long term store of value.
b. money can be spent for purchases. d. all of the above.

14. Money is different from other assets like capital and bonds in that:
a. money has intrinsic value. c. capital and bonds are better long term stores of value.
b. money pays a higher rate of interest. d. all of the above.

15. When households reduce their average money balances, they
a. purchase more goods. c. incur more opportunity costs.
b. they earn less interest. d. incur more transaction costs.

16. If a person’s income doubles we expect their cash holding to:
a. double. c. less than double.
b. more than double. d. decline.

17. Economies of scale in cash management means:
a. at a higher income household’s hold more money as a proportion of their income. c. the proportion of income held is not affected by household income.
b. at lower incomes household’s hold more money as a proportion of their income d. at lower income households hold less money as a proportion of their income.

18. Real money demand does not change when:
a. nominal GDP changes. c. the price level changes.
b. the interest rate changes. d. all of the above.

19. Among the source of transactions costs associated with reducing average money balances are:
a. brokerage fees. c. the time spent going to the ATM.
b. the time spent going to the bank. d. all of the above.

20. Among the sources of transactions costs associated with reducing average money balances are:
a. brokerage fees. c. foregone interest payments.
b. opportunity costs. d. all of the above.

21. Among the source of transactions costs associated with reducing average money balances are:
a. foregone interest payments. c. opportunity costs.
b. the time spent going to the bank or ATM. d. all of the above.

22. The demand for money is:
a. negatively related to the price level. c. positively related to real GDP.

b. positively related to the interest rate. d. all of the above.

23. The demand for money is:
a. negatively related to the price level. c. negatively related to real GDP.

b. negatively related to the interest rate. d. all of the above.

24. The demand for money is:
a. positively related to the price level. c. negatively related to real GDP.

b. positively related to the interest rate. d. all of the above.

25. The demand for money is:
a. positively related to the price level. c. positively related to real GDP.

b. negatively related to the interest rate. d. all of the above.

26. When the supply of money increases, then
a. the price level rises. c. money demand increases.
b. the price level falls. d. money demand decreases.

27. When the demand of money increases, then
a. the price level rises. c. the money supply increases.
b. the price level falls. d. the money supply decreases.

Figure 10.1

28. In Figure 10.1, if money demand decreases then:
a. the equilibrium price level rises. c. the money supply rises.
b. the equilibrium prices level falls. d. the money supply falls.

29. In Figure 10.1, if the money supply decreases then:
a. the equilibrium price level rises. c. money demand increases.
b. the equilibrium price level falls. d. money demand decreases.

30. In Figure 10.1 if the interest rate, i, were to increase, then
a. money demand decreases and the price level increases. c. the money supply and the price level would increase.
b. money demand increases and the price level decreases. d. the money supply and the price level would decrease.

31. In Figure 10.1 if real GDP, Y, were to increase, then
a. money demand decreases and the price level increases. c. the money supply and the price level would increase.
b. money demand increases and the price level decreases. d. the money supply and the price level would decrease.

32. In Figure 10.1 the interaction of the money supply and money demand determines:
a. real GDP. c. growth rate of the economy.
b. the price level. d. all of the above.

33. In Figure 10.1 if money demand increases faster than the money supply then:
a. the price level will rise over time. c. GDP will rise over time.
b. the price level will fall over time. d. GDP will fall over time.

34. In Figure 10.1 if the money supply increases faster than money demand then:
a. the price level will rise over time. c. GDP will rise over time.
b. the price level will fall over time. d. GDP will fall over time.

35. In Figure 10.1, if money demand increases then:
a. the equilibrium price level rises. c. the money supply rises.
b. the equilibrium price level falls. d. the money supply falls.

36. In Figure 10.1, if the money supply increases then:
a. the equilibrium price level rises. c. the money supply rises.
b. the equilibrium price level falls. d. the money supply falls.

37. Real money demand is:
a. Md/P. c. the purchasing power of money balances.
b. a function of real GDP and the interest rate. d. all of the above.

38. Real money demand is:
a. money demand after taxes. c. determined by the central bank.
b. a function of real GDP and the interest rate. d. all of the above.

39. Real money demand is:
a. determined by the central bank. c. the purchasing power of money balances.
b. money demand after taxes. d. all of the above.

40. If the money supply doubles, then
a. real GDP doubles. c. the interest rate, i, doubles.
b. real money demand doubles. d. none of the above.

41. If the money supply doubles, then
a. GDP doubles. c. the interest rate, i, doubles.
b. the price level doubles. d. none of the above.

42. Under price level targeting the money supply becomes:
a. neutral. c. exogenous.
b. endogenous. d. predetermined.

43. During a recession,
a. the interest rate and real GDP fall tending to cause money demand to fall. c. the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.
b. the interest rate and real GDP rise tending to cause money demand to rise. d. the interest rate rising and real GDP falling tend to cause money demand to rise.

44. If policy makers target a specific price level, then:
a. the money supply becomes exogenous in the model. c. the money supply becomes endogenous in the model.
b. the money supply becomes predetermined in the model. d. the money supply becomes neutral in the model.

45. In US data from 1954 to 2006, the price level is:
a. procyclical as we would expect if the monetary authority does not vary the money with the business cycle. c. countercyclical as we would expect if the monetary authority does not vary the money supply with the business cycle.
b. procyclical as we would expect if the monetary authority varies the money supply with the business cycle. d. countercyclical as we would expect if the monetary authority varies the money supply with the business cycle.

46. Real money demand is:
a. L(Y, i). c. P • L(Y, i).
b. equal to the money supply. d. all of the above.

47. Money demand and the money supply are brought into equilibrium by:
a. real GDP adjusting. c. the interest rate adjusting.
b. the price level adjusting. d. the real wage rate adjusting.

48. Price level targeting implies that the monetary authority:
a. changes the money supply to match movements in money demand. c. changes money demand and money supply to match movements in the price level.
b. changes money demand to match movements in the money supply. d. changes money demand to match movements in the price level.

49. The neutrality of money implies:
a. one time changes in real variables do not affect money demand. c. one time changes in nominal variables do not affect money demand.
b. one time changes in the money supply do not affect real variables. d. one time changes in the money supply do not affect nominal variables.

50. If for one period the money supply increases, then:
a. real GDP increases. c. real capital per worker increases.
b. the real wage increases. d. none of the above.

51. If James performs one hour of house cleaning for Lilly in exchange for Lilly performing one hour of yardwork for James, then the exchange involved
a. barter. c. items with no intrinsic value.
b. fiat money. d. the capital services market.

52. Fiat money would most likely hold the dominant position as a medium of exchange when
a. legal restrictions prevent private firms from issuing small, interest-bearing bonds as substitutes for money. c. the government requires that taxes be paid using the fiat money.
b. the government declares the money to be legal tender. d. all of the above.

53. The monetary base does not include
a. total currency in circulation. c. bank deposits at the Federal Reserve.
b. checkable deposits. d. all of the above.

54. Checkable deposits are
a. deposits at financial institutions that can be withdrawn only after paying a penalty. c. deposits at financial institutions that can be withdrawn by writing a check.
b. savings deposits at financial institutions that can be withdrawn by transfer to another account. d. deposits on which the bank checks the deposit slip carefully.

55. If Alicia transfers $100 from her savings deposit account to her checkable deposit account, then M1
a. increases and M2 stays the same. c. increases and M2 decreases.
b. increases and M2 increases. d. decreases and M2 increases.

56. If Hagen transfers $100 from his checkable deposit account to his savings deposit account, then M1
a. increases and M2 stays the same. c. decreases and M2 stays the same.
b. increases and M2 increases. d. decreases and M2 increases.

57. U.S. data show that checkable deposits have
a. increased in importance as a payment method. c. increased in importance as a portion of M1.
b. decreased in importance as a payment method. d. decreased in importance as a portion of the monetary base.

58. Which asset below is the least useful long-term store of value?
a. bonds. c. either (a) or (b).
b. ownership of capital. d. money.

59. A household’s demand for money arises from the household’s
a. optimal strategy for money management. c. need to provide capital services to the market.
b. need to provide labor services to the market. d. desire to increase its transactions costs.

60. The empirical evidence on the demand for money finds that
a. an decrease in the price level lowers the real demand for money in the same proportion. c. an increase in the price level lowers the nominal demand for money in the same proportion.
b. interest rates are negatively related to money. d. real GDP is negatively related to money.

61. The point where money supplied equals money demanded determines
a. the real interest rate. c. the price level.
b. the nominal interest rate. d. the real return on capital services.

62. Which of the following scenarios would mostly likely cause the price level to double?
a. The nominal quantity of money demanded doubles. c. The nominal wage doubles.
b. The nominal quantity of money demanded falls by half. d. The nominal quantity of money supplied doubles.

63. In general equilibrium, a one-time increase in the nominal quantity of money supplied
a. does not affect the interest rate. c. decreases the interest rate.
b. increases the interest rate. d. either (a) or (b).

64. The general equilibrium in the Barro model assumes that prices are
a. inflexible and adjust slowly. c. unaffected by changes in the money supply.
b. flexible and adjust rapidly. d. unimportant in explaining money demand.

65. Most economists agree that money is
a. not neutral in the long-run. c. neutral in the long-run.
b. not neutral in the short- or long-run. d. neutral in the short-run.

SHORT ANSWER

1. What is the money demand function and what is the direction of influence of the variables on money demand?

2. Why does economizing on money balances lead to greater transactions cost?

3. How do money demand and the money supply interact to determine the price level?

4. What does money neutrality mean?

5. What would happen to money demand, the money supply and the price level if there were a positive shock to production?

6. According to the Barro model, will the price level be high or low in a recession?

Chapter 11

TRUE/FALSE

1. The real rate of interest is the nominal rate of interest less the expected inflation rate.

2. The real return on money is zero.

3. An increase in the money growth rate affects household consumption, C.

4. In the market clearing model, an increase in the money growth rate leads to an increase in the inflation rate.

5. In the market clearing model an increase in the money growth rate leads to a decrease in the nominal interest rate.

6. Inflation is a measure of the growth of prices in the volatile food and energy categories.

7. Households with rational expectations have no errors in their predictions.

8. Expected and actual inflation are equal in a model with rational expectations.

9. Deflation occurs when the inflation rate slows down, but remains positive.

10. Data show a strong negative relationship between the inflatin rate and the growth rate of nominal currency.

MULTIPLE CHOICE

1. The actual inflation rate is:
a. the change in the price level divided by the original price level. c. the original price level divided by the new price level.
b. The original price level divided the change in price level. d. the new price level divided by the original price level.

2. If the price level last year was 110 and this year is 118, then the inflation rate between last period and this period was:
a. 7.3%. c. 8%
b. 7%. d. 6.8%.

3. If the price level last year was 135 and this year is 142, then the inflation rate between last period and this period was:
a. 4.9%. c. 5.1%
b. 7%. d. 5.2%.

4. If the price level last year was 106 and this year is 102, then the inflation rate between last period and this period was:
a. -3.8% c. 3.8%
b. 4%. d. -3.9%.

5. The unexpected inflation rate is:
a. the expected inflation rate less the actual inflation rate. c. the actual inflation rate less the expected inflation rate.
b. the expected inflation rate divided by the actual inflation rate. d. the actual inflation rate divided by the expected inflation rate.

6. If the expected inflation rate is 5% and the actual inflation rate is 4%, then the unexpected inflation rate is:
a. 1%. c. -1%.
b. 9%. d. 1.25%.

7. If the expected inflation rate is 3% and the actual inflation rate is 5%, then the unexpected inflation rate is:
a. 2%. c. -2%.
b. 8%. d. 1.67%.

8. If the expected inflation rate is 5% and the unexpected inflation rate is 4%, then the actual inflation rate is:
a. 1%. c. -1%.
b. 9%. d. 1.25%.

9. If the expected inflation rate is 3% and the unexpected inflation rate is -2%, then the actual inflation rate is:
a. 2%. c. -2%.
b. 1%. d. 1.67%.

10. The real interest rate is
a. the nominal interest rate plus the expected inflation rate. c. the nominal interest rate less the expected inflation.
b. the nominal interest rate divided by the expected inflation rate. d. the expected inflation rate divided by the nominal rate of interest.

11. If the nominal interest rate is 5% and the expected inflation rate is 2%, then the expected real rate of interest is:
a. 7%. c. 2.5%.
b. 3% d. -3%.

12. If the nominal interest rate is 2% and the actual inflation rate is 5%, then the actual real rate of interest is:
a. 7%. c. 2.5%.
b. 3% d. -3%.

13. When the real interest rate, r, can differ from the nominal interest rate, i, then:
a. money demand depends on the real rate of interest. c. consumption depends on the nominal rate of interest.
b. consumption depends on the real rate of interest. d. money demand no longer depends on any interest rate.

14. An indexed bond is one:
a. that pays a real rate of interest. c. that is indexed to the expected inflation rate.
b. that is indexed to the economic growth rate. d. that pays a nominal rate of interest.

15. The data on countries around the world show that:
a. the inflation rate is positively related to the growth of currency. c. the inflation rate is inversely related to the growth of currency.
b. the inflation rate is unrelated to the growth in currency. d. countries with high currency growth rates have higher real GDP.

16. The nominal rate of interest on money is:
a. zero. c. minus the inflation rate.
b. real rate of return on money less the inflation rate. d. all of the above.

17. The nominal rate of interest on money is:
a. positive. c. minus the inflation rate.
b. real rate of return on money plus the inflation rate. d. all of the above.

18. The real rate of interest on money is:
a. zero. c. minus the inflation rate.
b. the nominal rate of return on money plus the inflation rate. d. all of the above.

19. If the interest rate is 5% and the inflation rate is 3%, then the nominal rate of return on money is:
a. 2%. c. 5%
b. 3% d. zero.

20. If the interest rate is 5% and the inflation rate is 3%, then the real rate of return on money is:
a. 2%. c. -3%
b. 3% d. zero.

21. If the interest rate is 6% and the inflation rate is 2%, then the nominal rate of return on money is:
a. 2%. c. 8%
b. 4% d. zero.

22. If the interest rate is 6% and the inflation rate is 2%, then the real rate of return on money is:
a. 2%. c. -2%
b. 4% d. zero.

23. In the market clearing model money growth is modeled as:
a. random. c. via the purchase of bonds.
b. lump-sum transfers. d. all of the above.

24. Lump sum transfers for money growth implies:
a. we need to analyze how transfer affects GDP. c. we need to analyze how transfers affect capital.
b. we do not have to analyze how households adjust their behavior to attract transfers. d. we need to model how households adjust their behavior to attract transfers.

25. The expected rate of inflation is:
a. the real rate of interest less the nominal rate of interest. c. the nominal rate of interest plus the real rate of interest.
b. the nominal interest rate on nominal bonds less the interest rate on indexed bonds. d. the interest rate on indexed bonds less the nominal interest rate on nominal bonds.

26. An increase in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. an increase in the price level.
b. a decrease in money demand. d. all of the above.

27. An increase in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. a decrease in the price level.
b. an increase in money demand. d. all of the above.

28. An increase in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. an increase in consumption.
b. a decrease in money demand. d. all of the above.

29. An increase in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. an increase in the price level.
b. an increase in consumption. d. all of the above.

30. An increase in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. an increase in the inflation rate.
b. a decrease in money demand. d. all of the above.

31. An increase in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. an increase in the inflation rate.
b. an increase in money demand. d. all of the above.

32. The growth rate of real money balances is:
a. the growth rate of nominal money less the inflation rate. c. the growth rate of nominal money plus the inflation rate.
b. the growth rate of nominal money divided by the inflation rate. d. the inflation rate divided by the growth rate of nominal money.

33. When the rate of growth rate of money is constant:
a. the inflation rate equals the growth rate of money. c. real money balance are fixed over time.
b. the nominal interest rate is the real rate of interest plus the growth rate of money. d. all of the above.

34. When the rate of growth rate of money is constant:
a. the inflation rate equals the growth rate of money. c. real money balance are declining.
b. the nominal interest rate rises. d. all of the above.

35. When the rate of growth rate of money is constant:
a. the inflation rate is growing. c. real money balance are declining.
b. the nominal interest rate is the real rate of interest plus the growth rate of money. d. all of the above.

36. When the rate of growth rate of money is constant:
a. the inflation rate is growing. c. real money balance are constant over time.
b. the nominal interest rate is declining. d. all of the above.

37. Real revenue from printing money is approximately:
a. the nominal interest rate times real money balances. c. the real interest rate times nominal money balances.
b. the money growth rate times real money balances. d. the money growth rate times nominal money balances.

38. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect the nominal interest rate to be:
a. 10%. c. zero.
b. 7%. d. 2%.

39. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect the inflation rate to be:
a. 10%. c. 5%.
b. 7%. d. 2%.

40. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 5%, then we would expect real money balances to:
a. fall. c. remain unchanged.
b. increase. d. to fluctuate.

41. If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to 3%, then we would expect the nominal interest rate to be:
a. 6%. c. 5%.
b. zero. d. 2%.

42. If the inflation rate is 2% and the nominal interest rate is 4% and the money growth rate increases to 5%, then we would expect the inflation rate to be:
a. 6%. c. 5%.
b. 7%. d. 2%.

43. A decrease in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. a decrease in the price level.
b. an increase in money demand. d. all of the above.

44. A decrease in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. an increase in the price level.
b. a decrease in money demand. d. all of the above.

45. A decrease in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. an increase in the price level.
b. an increase in money demand. d. all of the above.

46. A decrease in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. a decrease in the price level.
b. a decrease in money demand. d. all of the above.

47. A decrease in the money growth rate in the market clearing model causes:
a. a decrease in the nominal interest rate. c. a decrease in the inflation rate.
b. an increase in money demand. d. all of the above.

48. A decrease in the money growth rate in the market clearing model causes:
a. an increase in the nominal interest rate. c. an increase in the inflation rate.
b. a decrease in money demand. d. all of the above.

49. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate decreases to 2%, then we would expect the inflation rate to be:
a. 8%. c. 5%.
b. 7%. d. 2%.

50. If the inflation rate is 3% and the nominal interest rate is 5% and the money growth rate increases to 2%, then we would expect the nominal interest rate to be:
a. 4%. c. 5%.
b. 7%. d. 2%.

51. Inflation is
a. a continuing upward movement in the price level. c. a continuing upward movement in the prices of oil and food.
b. a one-time upward movement in the price level. d. a continuing upward movement in the price of labor.

52. Deflation is
a. a one-time downward movement in the price level. c. a declining, but positive, rate of inflation.
b. a continuing downward movement in the price level. d. a continuing upward movement in the price of labor.

53. From 2000 to 2006, the rate of change of prices in Japan was -0.2% per year. This is an example of
a. inflation. c. deflation.
b. hyperinflation. d. disinflation.

54. Cross-country data on inflation rates shows a strong and positive association with the
a. disinflation rate for the previous period. c. growth rate of nominal currency.
b. nominal and real interest rates. d. growth rate of real currency.

55. Households which form rational expectations will
a. exhibit procyclical patterns in their errors over time. c. exhibit deflationary patterns in their errors over time.
b. exhibit countercyclical patterns in their errors over time. d. not exhibit a systematic pattern of errors over time.

56. If the inflation rate between last year and this year is 5%, and the price level last year was 125, then the price level this year is
a. 131.25. c. 120.00.
b. 130.00. d. 100.00.

57. If the inflation rate between last year and this year is -5%, and the price level last year was 125, then the price level this year is
a. 100.00. c. 120.00.
b. 118.75. d. 131.25.

58. Households with rational expectations will
a. make accurate predictions each period. c. make procyclical errors in their predictions.
b. have no errors in their predictions. d. have errors in their predictions.

59. If the nominal interest rate is 7% and the expected inflation rate is 4%, then the
a. expected real interest rate is 3%. c. actual nominal interest rate is 3%.
b. actual real interest rate is 3%. d. expected nominal interest rate is 4%.

60. The Livingston survey
a. asks about 500 randomly-chosen households for their forecasts of the CPI. c. uses prices on indexed bonds to calculate inflation expectations.
b. asks about 50 economists for their forecasts of the CPI. d. uses the real interest rate to calculate estimates of the nominal interest rate.

61. If the interest rate on a regular Treasury bond is 8% and the interest rate on an indexed bond is 3%, then the
a. real interest rate is 5%. c. expected inflation rate is 5%.
b. real interest rate is 8%. d. expected inflation rate is 8%.

62. If the interest rate on a regular Treasury bond is 7% and the interest rate on an indexed bond is 3%, then the
a. expected inflation rate is 10%. c. expected inflation rate is 5%.
b. real interest rate is 7%. d. real interest rate is 3%..

63. In a model with a nonzero rate of inflation, the real rate of return from owning capital
a. equals the real interest rate. c. equals the nominal interest rate.
b. is greater than the real interest rate. d. is greater than the nominal interest rate.

64. In a model with a nonzero rate of inflation, real money demanded depends on
a. the real interest rate. c. the nominal interest rate.
b. the real depreciation rate. d. the nominal depreciation rate.

65. If the inflation rate equals 5% and the total real rate of return from owning capital equals 2%, then the
a. the depreciation rate equals 2%. c. nominal interest rate equals 2%.
b. real interest rate equals 2%. d. nominal interest rate is greater than 2%.

SHORT ANSWER

1. Derive the relationship between nominal and real interest rates.

2. After allowing for inflation expectations why does real money demand still depend on the nominal rate of interest?

3. What advantages are there to modeling money growth as lump-sum transfers?

4. What happens in the market clearing model when the money growth rate increases?

5. What is the government revenue from printing money?

6. If households have rational expectations, would they ever make errors in predicting inflation? Explain briefly.

7. In a model with nonzero inflation, what is the equilibrium relation between the interest rate and the rate of return from owning capital?